AB InBev/SABMiller: SA conditional approval

South African Competition Commission Concludes Investigation into the AB In-Bev/SABMiller deal and Recommends that the Merger be Approved Subject to Conditions

On 31 May 2016, the South African Competition Commission (SACC) recommended that that the Anheuser-Busch Inbev/ SABMiller merger be approved subject to various conditions relating to both competition and public interest concerns.

south_africaFrom a procedural aspect, the SACC’s recommendations are made to the South African Competition Tribunal, the adjudicative body ultimately responsible for approving a merger.

The SACC’s recommendations are not binding on the merging parties or the Tribunal. To the extent that the merging parties, or third parties, are concerned about the merger or the SACC’s recommendations, they may elect to participate in the hearing before the Tribunal.

In cases where neither the merging parties nor any third parties contest the SACC’s recommendations, the Tribunal usually rubber stamps the SACC’s recommendations.

We note that in terms of the SACC’s proposed recommendations, that the merging parties have made numerous undertakings to address the SACC’s concerns.

The following concerns and recommendations were proposed by the SACC:

  • A divestiture of SABMiller’s shareholding in the Distell Limited Group (a competitor of SAB in the cider market) within three years of the closing date of the transaction;
  • That no employees of the merged entity will be involved on the bottling operations of both Coca-Cola and PepsiCo and that no commercially sensitive information would be exchanged between employees in relation to these two soft drink entities;
  • AB Inbev will continue supplying third parties with ‘tin metal crowns’ in South Africa as AB Inbev will own the only ‘tin metal supplier’ in South Africa post merger for a period of 5 years;
  • AB Inbev should make at least 10% of its fridge space available, in small retail outlets or taverns, to competitors’ products to protect small beer producers;
  • The development of a R1 billion fund which will be used, inter alia, to develop barley, hops and maize output in South Africa;
  • No merger related retrenchments are to take place in South Africa, in perpetuity;
  • AB Inbev will continue to supply certain products to small beer producers;
  • AB Inbev will continue to ensure that it follows the same ratio of local production and will, itself, remain committed to sourcing products locally;
  • Undertakings to ensure that the merging parties will, within two years after closing the merger, propose to the Commission and Government its plan on how to maintain black participation in the company and preserve equity;
  • AB Inbev will continue to comply with the existing terms and conditions of the current agreements which exist between SABMiller and ‘owner-drivers’.

The merging parties have agreed to the majority of the conditions imposed on the merger. We note, however, that the SACC’s media statement does not make it clear that the merging parties have agreed to the divestiture recommendation. The merging parties have also not agreed to the proposed condition relating to a commitment to continue to supply small beer producers with hops and malt.

Accordingly, even in the absence of any third party intervention, this merger may still be contested before the Tribunal.

While the SACC’s official recommendations have not yet been published, it appears to us that a number of the concerns raised by the SACC relate to pre-existing concerns which are not merger specific. Furthermore, important aspect of the proposed recommendations, even those which have been agreed to between the parties, will be in perpetuity.

Furthermore, although what may appear to be a relatively innocuous proposed conditions which the merging parties shave agreed to, is that AB Inbev will respect the current existing contractual arrangements as between SABMiller and ‘owner drivers’.  Approving a merger subject to such a condition poses an interesting conundrum. What happens in the event that there is contractual dispute between Ab-Inbev and owner drivers in the future? Will the Tribunal have jurisdiction to hear such disputes and could the merged entity be subject to penalties for breaching a condition of the merger, despite a contractual dispute which may have little if anything to do with the merger itself?

We have previously, here on Africanantitrust raised our concerns regarding the merger specificity of the R1 billion development fund. To access our previous article on this topic, please click here.

In our view, the Competition Tribunal should satisfy itself that the proposed conditions, even if agreed to between the merging parties, should address merger specific concerns and nothing more. A decision by the Tribunal is precedent setting and has an impact on the transparency and certainty of the merger control process in South Africa. When mergers are approved subject to conditions which go beyond merger specificity, uncertainty is created.

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Ministerial meddling in mergers

Intervention by economic ministry outside proper competition channels yields R1 billion employment fund

As reported yesterday, AB InBev has agreed to a R1bn ($69m) fund to buoy the South African beer industry and to “protect” domestic jobs.  It is widely seen as a direct payment in exchange for the blessing of the U.S. $105 billion takeover of SABMiller by InBev — notably occurring outside the usual channels of the Competition Authorities, instead taking place as behind-closed-door meetings held between the parties and the Minister for Economic Development, Ibrahim Patel, and his staff.

Patel talks.jpgAs we reported earlier this week, the previously granted extension of the competition authorities’ review was “widely suspected that the request for the extension is due to intervention by the Minister of Economic Development, in relation to public interest grounds. Although there is no suggestion at this stage that Minister Patel is opposing the deal, the proposed intervention does highlight bring into sharp focus the fact that multinational mega-deals face a number of hurdles in getting the deal done.”
AAT has reported previously on “extra-judicial factors,” as well as the interventionism by the current ministry.  This latest deal struck by Mr. Patel and the parent of famed Budweiser beer includes a promise by the parties to preserve full-time employment levels in the country for five years after closing, according to AB InBev.  Moreover, the companies pledged to provide financial help for new farms to increase raw materials production of beer inputs like hops and barley.
The minister is quoted as saying: “This transaction is by far the largest yet to be considered by the competition authorities and it’s important that South Africans know that the takeover of a local iconic company will bring tangible benefits.  Jobs and inclusive growth are the central concerns in our economy.”
ABInbev

The holy trinity of InBev’s beers

Our editors and contributing authors have reported (and warned) on multiple occasions that the extra-procedural behaviour of the economic minister effectively side-lines the competition agencies, thereby eroding the perceived or real authority of the Competition Commission and the Tribunal.  Says Andreas Stargard, a competition law practitioner with a focus on Africa:
“This ‘unscripted’ process risks future merger parties not taking the Authorities seriously and side-stepping them ex ante by a short visit to the Minister instead, cutting a deal that may be in the interest of South Africans according to his ministry’s current political view, but certainly not according to well-founded and legislatively prescribed antitrust principles.  The Commission and the Tribunal take the latter into account, whereas the Minister is not bound by them, by principled legal analysis, nor by competition economics.”
This is especially true as the current deal involves the takeover of SABMiller, an entity that controls 90% of South Africa’s beer market.  From a pure antitrust perspective, this transaction would certainly raise an agency’s interest in an in-depth investigation on the competition merits — not merely on the basis of job maintenance and other protectionist goals that may serve a political purpose but do not protect or assure future competition in an otherwise concentrated market.
Says one African antitrust attorney familiar with the matter, “What may be a short-term populist achievement, racking up political points for Mr. Patel and the ANC, may well turn out to be a less-than-optimal antitrust outcome in the long run.”

Put your drink down: Fair Competition Commission threatens to un-do Diageo beer deal

Bloomberg’s reports in an article published today that Tanzania’s Fair Competition Commission is threatening to undo the previously-approved merger between Nairobi-based East African Breweries Ltd.’s and Serengeti Breweries Ltd., alleging that the conditions laid out in the 2010 approval of the deal had not been honoured by the parties.

Apparently, notice was given to EABL in late April: “The commission has issued a notice of an intention to revoke its own decision with respect to the merger against EABL.”

EABL is majority-owned by Diageo Plc and is the largest regional brewer, whereas Serengeti was the #2 player pre-merger.  The FCC conditioned its approval on

(1) Diageo’s sale of a 20% stake in rival Tanzania Breweries Ltd., (2) compliance with a requirement that Serengeti achieve “potential growth that is well beyond the level it was able to achieve previously,” (3) the obligation to continue promoting Seregenti’s corporate identity for five years post-merger, (4) an agreement not to shutter any of Seregenti’s existing plants without prior FCC approval, and (5) the submission of annual progress reports of compliance with the investment strategy plan submitted during the application of the merger.

At issue in the current challenge by the Commission is condition no. 2, i.e., the growth-target requirement imposed on the parties.  Competition-law experts are puzzled by the FCC’s imposition of said condition, said John Oxenham of the Africa-focused Primerio consulting firm:

“Forcing a company to divest itself of a rival unit prior to acquiring a target entity is commonplace, and so is the requirement that certain brands must be maintained post-acquisition.  But it is highly unusual in my view to see a revenue growth-target imposed on merging parties by a government antitrust enforcer.”

While noting that he had not seen the precise wording of the “potential growth” condition imposed by the FCC in 2010, “[h]ow does the regulator account for outside macro-economic factors, increased competition from other players, and similar third-party effects that are outside the control of the merging entities?“, said Oxenham.

We wish to observe that the FCC’s web site itself has no update on the topic.  Its most recent press release is from 2014 and the last newsletter that is available online dates from 2013.

Beer cartels: First fine sought in Mauritius leniency matter

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madagascar

Precedential leniency case yields initial fine

The Competition Commission of Mauritius (“the Commission”) has recommended fines of approximately €487,000 and €158,000 be imposed on Phoenix Beverages Ltd (PLB) and Stag Beverages, respectively, for their involvement in a cartel.

This is the country’s first cartel investigation to be made public, and the first time a party has used its leniency programme.

Phoenix and Stag have been accused by the Commission of colluding to divide the Mauritian and Madagascan beer markets between the two manufactures. The alleged agreement between the parties involved Stag leaving the Mauritian market, allowing Phoenix to dominate the country’s beer market.

Phoenix applied for leniency prior to the 24 May 2014 deadline and consequently received reduced fine.  Both companies assisted the Commission with its investigation.

The Executive Director of the CCM, Mrs. Kiran Meetarbhan, said:

“Many jurisdictions have developed programs that offer leniency because of the many benefits that flow from having them. In line with international best practices, the CCM has not lagged behind in developing a leniency program that has been reinforced so as to grant full amnesty to the first reporting firm in addition to offering judicial security to informants.

This investigation triggered our first leniency application since the CCM’s inception. This is also the first cartel investigation which I have launched in my capacity as Executive Director for which I have recommended financial penalties in addition to other measures to address competition concerns.

I wish to commend the main parties’ approach in this investigation which has revealed a true spirit of cooperation.  Leniency programs create powerful incentives to enterprises to race to self-report at an early stage. Evidence can thus be obtained more quickly, and at a lower direct cost, compared to other methods of investigation, leading to prompt and efficient resolution of cases. This case provides a perfect example of the manner in which a leniency application coupled with the active cooperation of the main parties have led to the successful completion of the investigation within a remarkable three months’ timeline.

The fine[] recommended on Phoenix Beverages Ltd takes into account its leniency application, absent which, the fines would have been higher. Phoenix Beverages Ltd took advantage of the amnesty provisions, which lapsed on 24th May 2014. We cannot stress enough the importance of the leniency programme with regards to collusive agreements.

Several factors help to free an economy from the malicious effects of a collusive agreement including a strong political support towards fighting cartels and a resilient commitment to equip the competition agency with the appropriate legislative framework and adequate financial resources. The Government has signified its intention to further empower the Competition Commission in order to better fight cartels. This was announced by the Prime Minister in his address to the Nation this year.”